D&O Market Outlook: Underpriced, Underreserved with No Cheap Cases

NEW YORK—The overall market is more unusual than 37-year insurance veteran Christopher J. Cavallaro has ever seen it.

A managing partner of ARC Excess & Surplus, Cavallaro says the insurance market is at a “tipping point” because the industry has underreserved its long-tail lines, including directors and officers.

“I don’t think anyone has the right reserves up on any book of business,” Cavallaro says at the annual Anderson Kill & Olick D&O seminar.

“You just don’t know where the next loss is coming from,” he warns, and policies are “terribly underpriced.”

For instance, Cavallaro says he doesn’t think one-tenth of litigation related to the 2008 economic downfall has surfaced.

For years, the property side of the insurance business has subsidized the casualty side. However, due to the enormous amount of catastrophes in 2011 and subsequent property-insurance payouts, the industry could not reserve on the casualty side. The money was earmarked for property claims, which are realized quickly.

“There are no cheap cases anymore,” says Cavallaro, who in 1986 left American International Group Inc. (AIG) after 12 years with the company to co-found ARC.

Harkening back to the “good old days,” he reminisced about the costs and relative ease of litigation compared to the current environment. Today in professional liability, the types of claims “aren’t fixed in a nice, neat box” and “they can come from anywhere.”

D&O exposure is not just about shareholder cases, he continues. Cases involving bankruptcy trustees and fraud are more frequent and very expensive.

Though the number and average value of securities class-action settlements fell in 2011, “it’s a lot worse everywhere else,” Cavallaro says.

Private-sector D&O is experiencing significant rate changes, and rates are down 45-55 percent since 2005.

“There is no simple answer,” he says. “We have to think outside the box.”

Cavallaro, who broke into the insurance business in 1974 as an underwriter for AIG, says underwriters have gone from being “gods” to the “brokers’ minions.”

“They are treated like a commodity,” he says. “It’s now about distribution.” The underwriter is “not respected like he should be.”